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A C QU I S I T IO NS Valuing and Acquiring Home Energy Businesses: Part 4 Presenting an Offer O NCE YOU HAVE FOUND A COMPANY TO ACQUIRE, YOU NEED TO structure an offer. A common method for calculating an offer is to look at your return on investment. Most purchasers are looking for a return on investment of between 18 percent and 30 percent. That may seem high when money mar- kets are paying less than .5 percent, but there is a risk reward and purchasing a home energy company comes with some risk. To make the calculation I would suggest that you look at your income statement or profit and loss statement and make conser- vative estimates of how the purchase will change your numbers. The first thing to do is calculate the projected gross profit. To do this you will need to multiply the gallons you think you will deliver by the margin you think you will have. To calculate ser- vice, estimate the total service revenue and subtract the projected cost of parts. Add the two together and that is your gross profit. The next step is to project what your operating expenses will be to service the business. Look at each line item expense from your income statement and calculate how much more expense you will have for each line. Now subtract the operating expense from the gross profit and you have the operating income, which is often referred to as "Cash Flow" or "EBITDA" (Earnings Before Interest, Taxes, Depreciation and Amortization). There are other factors that may come into play such as capital needed to invest for items such as propane tanks and vehicles. We recommend working with your accountant to review the numbers before making an offer. Cash offers are typically well received, but because of the risk involved in an all cash offer, the purchaser usually looks for a higher return on investment which means a lower purchase price. Earn-out offers based on performance are popular as it helps to minimize the risk for the purchaser. Earn-out pay- ments can be based on gallons (retained gallons), gross profit or even EBITDA. Once you have decided how you want to structure the offer, you need to present it to the seller. Most offers are submitted in a non-binding Letter of Intent (LOI). This is a legal document which should be pre- pared or reviewed by an attorney. The LOI should spell out exactly what is being purchased and exactly how it will be paid for. It should also address items which are adjust- ments to the purchase price. Some adjustments are vacation accruals, service contracts, inventory, and prepaid expenses. Other items to cover are non-competition terms, employment contracts, consulting agreements, and other items that have been discussed and agreed to by both parties. An important item is accounts receivable. Most purchasers want to collect the receivables and either remit them to the seller or buy them as part of the transaction. This gives the purchaser continuity with the customers. A detailed LOI will help the transaction to go more smoothly as both parties know up front what to expect. The LOI is basically an outline of what the closing documents will be. There will be additional items to negotiate in the closing documents, and that subject is covered in the next article in the series. l FON Steven Abbate, Cetane Associates LLC 4504 Stonecrest Drive Ellicott City, MD 21043 410-480-4930 office 410-404-3199 cell www.cetane.net www.fueloilnews.com | FUEL OIL NEWS | MARCH 2012 37